Doug Fath and Jeff Greco discuss profitable partnerships in their latest video. Click the video below to watch now.
| Jeff Greco: | Jeff Greco from Legacy Capital.
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| Doug Fath: | Doug Fath.
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| Jeff Greco: | Also, from Legacy Capital. Today we’re going to be talking about profitable partnerships. Before we get into the three phases of the partnerships, really the context for this video is, no matter if you’re forming an equity partnership where you’re having two people own or more, own a company, or you’re doing quasi-joint venture agreement, or maybe you’re even having an investor. What we found through the school of hard knock learning is that there are things that can really help make a difference in not only setting up a partnership and the business for success, but also in the eventuality. Or if some things don’t go as planned and you want to end the partnership, there are ways to end a partnership gracefully because really, Doug and I come from a perspective where a partnership, just like a strong marriage, it’s something to be valued and something to be watered, and something to be invested in to hopefully pay off or long time to come.
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| And there’s a commitment that not only hopefully the business is super profitable, but also that each person in the partnership is fulfilled and they have whatever they have going on in their personal lives as well.
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| Doug Fath: | Absolutely. Look, regardless of the type of partnership that you’re exploring entering into there are different and distinct phases in a partnership, which is what we’re going to talk to here. Every partnership, there’s the creation phase when you’re looking at creating it. And that certain roles and activities, then you’ve got the maintenance phase once the business is actually up and running, and humming.
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| Again, different roles and activities and conversations and questions during that phase. Then, the dissolution phase when things are going to dissolve those questions and things that are going to be happening then are very different. And really, the key is to understand those three different phases and to be able to engage and ask questions ahead of time before you get into the partnership.
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| You want to understand those three different phases and have those conversations now, ahead of time because oftentimes what happens is when people get involved in partnerships, it’s we’ll just do 50/50. They’re solely in the creation phase, and they’re not even having conversations or thinking about the two other phases.
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| Jeff Greco: | I laugh is when I share Doug is sharing and business partnership to marriage is sometimes right [inaudible 00:02:43] to not having these seemingly tough conversations up front. It’d almost be like saying yes to getting married to someone where you don’t know what religion you guys want to practice together, what holidays you’re going to celebrate or do you want kids. All this stuff that may be uncomfortable on the first date, and it would probably be a good idea to talk about those things before you walk down the aisle so you don’t have to deal with that stuff later on because I’ll speak from experience that as Doug said there is an emotional excitement and energy around the creation phase, we’re going to make a lot of money, we’re going to be so happy, everything is going to go great. And if you don’t have these conversations upfront, one person may be acting in accordance to what they assumed you guys had agreed to or thought about.
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| The other person may be upset, disappointed, frustrated, pissed off that someone is not acting a certain way. When, really, all that happened is people didn’t have those conversations up front to work them out. The one caveat is that this isn’t the easy way to go about it. Really, the structure of having these three phases, which we’ll dive into a minute is to really have those types of conversations that will make a difference as the business goes on. And not only having these conversations once, but also checking in, which we’ll talk about going forward.
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| Doug Fath: | Yeah. And I think you touched on this, but really I think the most important thing is as you look to enter into a partnership, the success of that partnership is going to go to the level that you’re willing to have the difficult conversations now ahead of time, as opposed to waiting once you’re in a partnership and in the middle of things, it gets a lot more difficult than.
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| Jeff Greco: | Yeah. So, let’s dive into the phases.
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| Doug Fath: | All right, let’s do it.
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| Jeff Greco: | All right. So, the three phases of the partnership, phase number one is creation, phase number two is maintenance, and phase number three is dissolution. In phase number one, creation, this is really where you’re creating the business. Right?
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| You’re thinking about, at a very basic level, what types of things will the business do? What types of the things will the business not do? So, you’re talking about business specific things.
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| You’re also inside the creation phase, having a conversation about what types of things work and not work for the individual people. For instance, does somebody have time constraints? Either they may have another job, or they have certain responsibilities at home. These are things to get out on the table. If one person is working late, and the other person has to work a certain amount of hours is one thing.
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| The other part of this is really starting to understand what you’re both respectively best at. What are your unique abilities or what type of strengths do you bring to the table? Look, as business owners, to get a business off the ground we’re all inherently doing things that were not necessarily best at, or we want to do, or we like doing. But, at some point, how do you create the business so that sooner rather than later you’re moving into each of the respective partners, focusing on what they’re best at.
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| Doug Fath: | Right. Another important piece during this creation phase is beginning to have conversations about what you and your partners are contributing to the business, and how you’re being compensated for that. In another video, we go into these distinctions. The difference between an operational contribution, versus an asset contribution. But, these are important things to dive into from the get go because if I’m just making an asset contribution, whether it’s dollars or some other asset that I’m contributing, I may not have any involvement in the operation activities.
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| If I’m only contributing assets, I want to be clear, we want to be clear, what’s the compensation for those assets. On the flip side, sometimes you have owners and I think often times, especially with the clients we’re working with. They’re active investors and business owners.
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| There may be asset contributions that they’re making, but they’re also involved in the operations. Preforming operational roles. So, you want to understand what is that compensation, or expected compensation for the operational roles versus the asset contributions.
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| Jeff Greco: | Specifically in our business when people come to us, if there is a partnership, and they are looking for a loan. Certainly, we will review the legal documents of a company to understand the ownership, and what those organization dots look like. Really, we like to take it a step further to check in, and ask questions about who is doing what.
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| Really, to help our perspective or existing clients think through some conversations that they may not have had because we’ve had partnerships that have ended. And we’ve had clients partnerships that have ended, and really, again, just trying to kind of cause those conversations to happen so that there’s not as much disappointment down the line.
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| Phase number two is maintenance. After the business is created at a high level, the legal entity may be set up, everyone is clear on what they’re doing. As Doug said, who is bringing what to the table? The maintenance is once the business is up and going, what type of check-ins or meetings, or conversations are you going to have on an ongoing basis?
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| So, depending on the operating system in which your business is using, you may have these daily, weekly, monthly, quarterly, annually. But, there are certain things to check-in about, to see if it still holds up. And look, there may be things inside or outside the business that have changed.
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| If one of the members of the partners have had a child, that may have changed things. Or, if one of the members of the business may be has started a new business. There could be a whole host of reasons where what was set out for the creation, and things are going to change.
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| Doug Fath: | Right.
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| Jeff Greco: | The maintenance is checking in on, at a basic level, is this still working? What do we need to talk through? What do we need to figure out? Or what we thought had handled, but really situations change. Is this still working? And getting inside of how we make sure that this is successful for a long time to come.
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| Doug Fath: | Right. And your role may change as well. As an example, during the creation phase, when no money is coming in, there may be certain roles and activities that you’re taking on. Maybe during the creation phase you’re doing the bookkeeping for the company. And as you get into the maintenance phase, and the business is growing, you now are going to hire a bookkeeper to handle that.
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| Now, you may not be doing the bookkeeping role anymore. But, now you’re managing that bookkeepers. Just understanding the different roles. Not only as you go from doing it, to maybe being a manager. How does that also affect compensation, right? Maybe around the creation phase you were getting paid a smaller stipend or something to do the bookkeeping. But, now that you’re managing the bookkeeper, you’re obviously paying the bookkeeper, are you still getting some sort of compensation for managing the bookkeeper? That’s just an example of that.
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| Another example for our clients that are doing construction is they may be GCing their own projects during the creation phase. And as the business reaches stabilization, and they move into the maintenance phase, they’re now going to hire a GC, and they’re going to manage a GC. It just really depends on the business, and the roles that you’re operating in. But, those are a couple examples of some things to look at as you go from the creation to the maintenance phase.
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| Jeff Greco: | As Doug mentioned inside the maintenance phase in terms of the compensation, as a business gets started … In an earlier video we talked about how to potentially allocate the free cash flow. In the maintenance phase, you talk about how large you want your reserves to be, what type of salaries you want to draw for the owners? What do you do for the investment activities? Is it time to hire your first employee? These are all conversations that get to happen inside the maintenance phase.
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| Phase number three is dissolution. This can be a negative connotation to it, and it could also, potentially be a positive connotation in the sense of one you get to talk about these items when everyone is still in good spirits with people. There are possibilities they get to talk about that in the event something had to change, how would the business unwind, God forbid an injury or a death happens. How is that handled?
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| Really, the process of going through the creation, maintenance, and dissolution, is asking the questions at each stage of the business. It has a bunch of the eventualities talked about. So, there’s not surprises when an event happens that may not be thought about.
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| Doug Fath: | Right. And there’s some ways to solve for the dissolution conversation ahead of time. Such as a buy, sell agreement as one example. But, there’s other ways to before you get into partnership, you want to have sort of clear options to what dissolution looks like when that comes.
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| I think when people hear dissolution, oftentimes, they think of it as a bad thing. It can be. But, it doesn’t necessarily mean that it’s a bad thing. Right? You could have had a super successful partnership where now you’re exiting for some multiple, the company is going to dissolve because you’ve just sold off all those assets and had a nice payday from it.
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| Jeff Greco: | People can also have had a change in their personal life, where they realize they want to spend more time with their family or they’d rather not spend as much time doing this specific thing. But, they want to spend more time doing another thing. Really, all of that happens inside of a dissolution conversation.
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| The business may still go on, but maybe one of the partners exits in a way, they may or may not still have a financial, or an ownership contribution. But, maybe operationally they want to remove themselves from the business. And all of those things can be talked about and figured out in an equitable way inside the dissolution conversation.
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| Doug Fath: | In order to be able to … In that example, if you want to remove yourself as an operator, that’s where we spoke about the difference between operational contributions, and asset contributions. If you have that defined, and set up front, it becomes really easy to see the impact, if you remove yourself as the operator, you still have your asset contributions and ownership. So, you’re able to clearly see what the impact of that is going to be on the business and easily plan for that. As opposed to waiting for the dissolution conversation, and not having any idea what that impact is going to look like.
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| Not only for the business, but also for you as the owner. Again, we got a whole nother video where we really dive into the distinction between those types of contributions.
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| Jeff Greco: | We hope that you go forth and create extremely profitable partnerships. And have those difficult challenging conversations upfront so that if they last forever, amazing. And if they don’t, maybe you’ve had something here or going through the process that will help you ease the pain and make it softer for everyone. And who knows, maybe even stay friends or stay in some sort of a relationship in the event of a dissolution, which is really all possible inside of this structure.
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| Doug Fath: | Or, the last thing is, by having these conversations, and having these difficult conversations maybe it actually prevents you from getting into a partnership that would have turned bad. I can think there was a partnership that Jeff and I were looking into. We spent probably about eight months looking into that partnership, and buying in, and investing in the partnership. We went through this process, had many conversations, spent a lot of time. We ended up not moving forward with the partnership, which we were both extremely disappointed in because we had invested that time, that money.
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| But, it was actually the best thing because of those difficult questions that we asked. We realized even though the business was profitable, there were some amazing things about it, which had us interested in it. It just was not going to be a successful partnership for us. It’s not only once you get into partnership, but it can also be a big time saver for preventing me from getting into partnerships that you shouldn’t be getting into.
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